Analysis & Opinion

SAN FRANCISCO May 25 (Reuters) - Groupon Inc is
testing a payments service that lets merchants accept credit
cards at what could be a knock-down price, according to two
people familiar with the matter.

The move puts the world's largest daily-deals company in
direct competition with eBay Inc's PayPal, and start-up
Square Inc, partly owned by Visa Inc.

Groupon started in 2008 by offering heavily discounted deals
on local goods and services. However, Chief Executive Andrew
Mason and Chief Financial Officer Jason Child have grander plans
for the company to become the "operating system" for local
commerce, as Mason put it recently.

While Groupon's goals have been met with skepticism by Wall
Street analysts, the company recently unveiled a slew of new
products and services for local merchants, including a
scheduling system and a customer-loyalty program.

Groupon's nascent payment service comes with an Apple iPod
Touch, and a case that wraps around the back of the device,
which allows merchants to swipe credit cards, the people said.
They did not want to be identified because the service has not
been officially announced, and is in an early testing phase with
some Groupon merchants.

PayPal, Square and other payment companies like VeriFone
Systems are offering so-called dongles that plug into
the top of mobile devices such as iPhones and iPads.

However, Groupon went with a wrap-around case for its test
because dongles have the potential to snap off, the people said.

Groupon is aiming for fees that are competitive with PayPal
and Square, although the company has yet to finalize the fee
structure, the people added.

Groupon may have flexibility to charge lower fees because it
could subsidize the payments service from money it makes
providing other services to merchants, they said.

PayPal's service, known as PayPal Here, charges a fee of 2.7
percent of the purchase price for all types of credit and debit
cards - including those issued by American Express Co..
Transaction fees for processing AmEx cards are often higher.
Square charges 2.75 percent per swipe.

Groupon's test service is charging a 1.8 percent transaction
fee and 15 cents per transaction, Rocky Agrawal, an industry
analyst, reported in a VentureBeat blog late Thursday.